Alken-Ziegler, Inc. v. Waterbury Headers Corp.

• Decision Date: 12 October 1999
• Docket Number: Docket No. 111783.
• Parties: ALKEN-ZIEGLER, INC., Plaintiff-Appellant, v. WATERBURY HEADERS CORPORATION, Defendant-Appellee, and Waterbury Headers, Inc., Defendant.
• Court: Michigan Supreme Court

600 N.W.2d 638

461 Mich. 219

ALKEN-ZIEGLER, INC., Plaintiff-Appellant, v. WATERBURY HEADERS CORPORATION, Defendant-Appellee, and Waterbury Headers, Inc., Defendant.

Docket No. 111783.

Supreme Court of Michigan.

October 12, 1999.

Smith, Haughey, Rice & Roegge (by Jon D. Vander Ploeg), Grand Rapids, for the plaintiff-appellant.

Dingeman, Dancer & Christopherson, P.L.C. (by Mark R. Dancer and Michael J. Daray), Traverse City, for the defendant-appellee.

Opinion

PER CURIAM.

We must decide in this contract action whether the circuit court abused its discretion in denying the motion by defendant Waterbury Headers Corporation to set aside the default entered because of its failure to respond to the plaintiff's summons and complaint. We hold that the circuit court did not abuse its discretion, and we thus reverse the judgment of the Court of Appeals.

I

Plaintiff Alken-Ziegler, Inc., manufactures cold-formed steel products at its factory in Kalkaska. In May 1991, the plaintiff contracted with Waterbury Headers, Inc., of Connecticut to convert one of the plaintiff's machines so that it could make a different type of product. The plaintiff paid the contract price, but a dispute arose regarding whether the machine had been properly converted.

In May 1994, the plaintiff filed suit in Kalkaska Circuit Court against Waterbury Headers, Inc. (Waterbury # 1). Waterbury # 1 sought summary disposition on the basis that the circuit court lacked jurisdiction. The circuit court denied summary disposition, and the Court of Appeals denied Waterbury # 1's application for leave to appeal, for failure to persuade the court of the need for immediate appellate review.¹

In the meantime, having learned that Waterbury # 1 had sold substantial assets to a New York company called Waterbury Headers Corporation (Waterbury # 2), the plaintiff filed an amended complaint in March 1996 that named Waterbury # 2 as a defendant on a theory of successor liability. The resident agent for Waterbury # 2 was served with the summons and complaint by registered mail at the beginning of April 1996.

The deadline for Waterbury # 2 to file a reply under MCR 2.108(A)(2) was the first of May 1996. When no answer arrived, the plaintiff requested that Waterbury # 2 be defaulted pursuant to MCR 2.603(A)(1). The default was entered by the court clerk about three weeks later.

The plaintiff then requested a default judgment under MCR 2.603(B), and the matter was scheduled for an early July 1996 hearing to determine damages. No defendant appeared at the hearing, but the court took testimony from the plaintiff's president and chief operating officer concerning damages. At the conclusion of the hearing, the court approved an award of $337,453.93, and directed the plaintiff's counsel to prepare an order.

In mid-July 1996, Waterbury # 2 moved to set aside the default. Waterbury # 2 also objected to the proposed order of default judgment. It submitted affidavits from its president and from the chairman of the board of Waterbury # 1.

In his affidavit, the Waterbury # 2 president stated that upon receiving the plaintiff's summons and complaint, he had contacted the board chairman of Waterbury # 1 about providing defense and indemnification, as agreed upon between Waterbury # 1 and Waterbury # 2 under their asset-purchase agreement. According to Waterbury # 2, the board chairman promised to take care of the matter.

In his affidavit, the board chairman of Waterbury # 1 acknowledged that he had been contacted by Waterbury # 2, and that he had promised to retain counsel to provide Waterbury # 2 with a defense. He said that because of his travel schedule he did not advise Waterbury # 1's counsel of the conversation, but assumed that counsel would respond.

The circuit court heard argument in early September 1996 on Waterbury # 2's motion to set aside the default. Counsel for Waterbury # 1 stated on the record that he did not oppose the motion. The circuit court denied the motion, however, and gave the defense thirty days to file objections to the proposed judgment or to settle the matter.

In mid-November 1996, the parties stipulated to the dismissal of Waterbury # 1 without prejudice.

At the conclusion of a hearing in early December 1996, and over Waterbury # 2's objections, the circuit court signed a $337,453.93 default judgment in the plaintiff's favor. The order denying Waterbury # 2's motion to set aside the default was signed that same day.

The Court of Appeals reversed,² and the plaintiff seeks leave to appeal.

II

MCR 2.603(D) governs motions to set aside a default. The court rule provides, in pertinent part:

(1) A motion to set aside a default or a default judgment, except when grounded on lack of jurisdiction over the defendant, shall be granted only if good cause is shown and an affidavit of facts showing a meritorious defense is filed.

The Court of Appeals emphasized that a trial court's decision regarding whether to set aside a default will not be disturbed absent an abuse of discretions Park v. American Casualty Ins. Co., 219 Mich. App. 62, 66, 555 N.W.2d 720 (1996).³ Citing Reed v. Walsh, 170 Mich.App. 61, 64, 427 N.W.2d 588 (1988), the panel then explained that, for the purpose of applying MCR 2.603(D), what "good cause" means:

(1) A substantial irregularity or defect in the proceeding upon which the default is based.

(2) A reasonable excuse for failure to comply with the requirements that created the default.

(3) Some other reason showing that manifest injustice would result if the default is not set aside.

Noting that Waterbury # 2 did not allege an irregularity in the proceeding below, the Court of Appeals thus examined whether the defendant had presented a reasonable excuse for the default, and whether a manifest injustice would result from enforcing the default judgment.

The Court of Appeals was not persuaded that Waterbury # 2 had a satisfactory explanation for its failure to answer the complaint and summons. Although the president of Waterbury # 2 had contacted an officer of Waterbury # 1 and obtained an assurance that Waterbury # 1 would provide legal counsel and indemnification, Waterbury # 2 then disregarded the matter until after the default was entered. This was neither diligent nor reasonable. A party is responsible for any action or inaction by the party or the party's agent. Levitt v. Kacy Mfg. Co., 142 Mich.App. 603, 609, 370 N.W.2d 4 (1985). Regarding the apparent failure of counsel for Waterbury # 1 to act on behalf of Waterbury # 2, the panel observed that the neglect of an attorney is not good cause and may be imputed to a party against whom default is entered. Kuikstra v. Cheers Good Time Saloons, Inc., 187 Mich.App. 699, 703, 468 N.W.2d 533 (1991), rev'd in part on other grounds 441 Mich. 851, 489 N.W.2d 468 (1992).

The Court of Appeals was persuaded, however, that Waterbury # 2 had demonstrated that a manifest injustice would result if the default were not set aside. Thus, the Court concluded, Waterbury # 2 had shown "good cause" for purposes of MCR 2.603(D). The panel explained:

A defendant can demonstrate that manifest injustice would result if there is no evidence that the defendant intentionally delayed the proceedings, if plaintiff had not been prejudiced by the defendant's default, if the period of inactivity was not unreasonable, and if the defendant presented evidence that, if proved, would establish a meritorious defense. Reed, supra at 66, 427 N.W.2d 588.

Plaintiff does not allege that defendant intentionally delayed the proceedings. Further, plaintiff does not argue that the delay prejudiced either its ability to prove its case or its ability to gain the benefits of the relief sought. Further, neither the circuit court in the proceedings below, nor plaintiff in responding to the present appeal, complain[s] that defendant's periods of inaction were unreasonable.... Thus, defendant can establish manifest injustice from its having to pay plaintiff more than $300,000 if defendant can establish a meritorious defense. [Slip opinion, 3-4.]

Elaborating on the question of meritorious defense, the Court of Appeals emphasized that the president of Waterbury # 2 had listed four theories in his affidavit. First, he contended that the circuit court lacked personal or subject-matter jurisdiction. Second, he argued that Waterbury # 2 was not a party to the contract between Waterbury # 1 and the plaintiff. Third, he said that Waterbury # 1 expressly had agreed to defend and indemnify Waterbury # 2 with regard to controversies such as this. Fourth, he argued that Waterbury # 2 was not the successor corporation of Waterbury # 1.

The Court of Appeals rejected Waterbury # 2's indemnification argument on the basis that the fact that a party is entitled to indemnification from another entity is not by itself a meritorious defense to a default judgment. Hartman v. Roberts-Walby Enterprises, Inc., 17 Mich. App. 724, 727, 170 N.W.2d 292 (1969). The panel also rejected Waterbury # 2's jurisdictional argument, reasoning that the defendant had waived any objection to personal jurisdiction, for purposes of this appeal, and that its argument about subject-matter jurisdiction was no more than a bare assertion.

With regard to the other issues, however, the Court of Appeals said that Waterbury # 2 had put forward a meritorious defense. Thus, it was necessary to remand for further proceedings in order to prevent a manifest injustice. The Court explained:

There exists a factual dispute regarding whether defendant purchased all or merely some of the assets of Waterbury # 1, and whether Waterbury # 1 remains a going concern. Further, while the similarity in name between the two corporations implies continuity, their locations in different states weigh in the other direction. Whether defendant is a successor corporation to Waterbury I remains an issue of fact, which, if resolved in defendant's favor [,] would provide defendant with an

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